Banana Republic Capitalism

Although I have written several times about what is going on with the auto companies (Government Motors, Obama the CEO, on SNL, Obama Forces Private Businessman Out of Job), I'm not a lawyer, and so I don't have the correct grasp on language that some real lawyers do. I mean, I know intuitively that what is going on is not right (What does a Political Economy look like? and Michigan Businesses Battle Government Regulations ...), but I can't describe what is going on in the US as well as the guys over at Power Line can. This is a great post (read it here):

The Chrysler reorganization is shaping up as another milestone in the decline of the rule of law under Barack Obama. We've said for quite a while that bankruptcy is the only viable option for Chrysler and General Motors, not--as Obama claims--because they don't know how to make the right kinds of vehicles, but because their unsustainable union contracts make it impossible for them to be profitable. That reality has now been turned on its head, as the administration has tried to bully Chrysler's secured creditors into going away, while the United Auto Workers Union, solely on the basis of political clout, would be paid at an implied rate of 50 percent and would emerge owning 55 percent of the company, with the government also holding a stake.

This is banana republic capitalism at its worst. Political influence, rather than the law, dictates the rights of the parties. When some of the secured creditors refused to be intimidated, Obama libeled them in the press, saying, outrageously, "I don't stand with those who held out when everyone else is making sacrifices." Actually, under Obama's plan the politically favored parties, principally the UAW, will benefit--will steal money, to put it crudely--from the parties who held out. Those parties call themselves the "non-TARP lenders."

This highlights the government's conflict of interest in this transaction, as in so many others now underway. Some of Chrysler's secured creditors are banks who received TARP money. As the New York Times put it, those lenders are "beholden to Washington" and "defying the administration was never a serious option."

It remains to be seen what will happen in bankruptcy court. Already one key player, Perella Weinberg Partners, "under intense pressure from the White House," has caved in and agreed to accept Obama's terms. Whatever the ultimate result, this episode will have consequences. The Wall Street Journal notes:If the current plan is pushed through, then good luck to any unionized firm trying to raise secured debt on decent terms in the future.

For Chrysler, the administration's plan spells disaster. It is inconceivable that the UAW, the principal source of Chrysler's problems, will manage the company back to profitability. More likely, Chrysler will become a vehicle through which the federal government provides uneconomic subsidies to unionized auto workers and retirees.

Barack Obama's conduct in this affair has been disgraceful. Our bankruptcy laws are well developed and are fairly implemented by experienced bankruptcy judges. Priority among creditors is established according to legal rules and precedents. The process is transparent and subject to appellate review. But in this case, the law did not favor the parties who have the most influence with the White House--notably, the United Auto Workers--so Obama substituted political threats and bullying for due process. Il Duce would have approved.

I would also suggest you check out this article in the Detroit News- here are a couple good parts:

They are being demagogued as "speculators" by President Barack Obama and as "vultures" by Gov. Jennifer Granholm and Oakland County Congressman Gary Peters.

They are the smaller bondholders who have refused to bow to the pressure of the Obama administration and accept a minuscule number of pennies on the dollar as repayment for their loans to Chrysler.

This confrontation could have been avoided if the Obama administration had treated the bondholders as equitably as the United Auto Workers, which gets far more money for the dollar.

The good-faith loans from the bondholders provided the operating capital for which Chrysler pledged its assets as collateral, an important role that the Obama administration wants to ignore as part of its forced restructuring program that favors the politically connected UAW.

The heavy-handed tactics of the Obama administration represent another government intrusion into the private sector and attempt to victimize a constituency that does not have the political clout of the unions.

The noncompliant bondholders are going to take their chances on winning back a bigger share of their shareholder investments in bankruptcy court, where the independent role of the judiciary will be expected to fairly judge their claims.

One hopes the Obama administration will not try to bully the courts the way it has private businesses.

It already will be tough to raise desperately needed money in the market for Chrysler to make its future vehicles after Obama's intervention and scapegoating of investors as "speculators." Government intimidation would represent an even greater danger to the country and obstacle to Chrysler's future

A smart man would bet money that the bankruptcy process will not be impartial and free from undue influence by government- rule of law has already be disregarded by the President, who wants to run America as he personally sees fit, and so I don't doubt for a second that he will personally pressure judicial appointments to decide the way he wants them to decide. America is dying, and our President is going to stop at nothing to loot the carcass for the benefit of himself and his friends.

UPDATE: Powerlineblog follows up with another good post to read-Banana Republic, Part II